U.S. in­vestors keep an eye on ris­ing wages, re­tail­ers

The Globe and Mail (Ottawa/Quebec Edition) - - REPORT ON BUSINESS - CARO­LINE VALETKEVITCH

U.S. com­pa­nies are warn­ing about ris­ing wages eat­ing into profit mar­gins, in­creas­ing in­vestor wor­ries that next year’s ex­pected drop in profit growth may be sharper than feared.

Amidst over­all strong quar­terly re­sults, climb­ing labour costs are a grow­ing con­cern, with more than a dozen com­pa­nies men­tion­ing them in con­fer­ence calls so far this earn­ings sea­son.

That is up from just a hand­ful of com­pa­nies that noted th­ese con­cerns over a sim­i­lar pe­riod in the year-ago quar­ter, an anal­y­sis of earn­ings calls by Thom­son Reuters showed.

Next week, sev­eral re­tail­ers in­clud­ing Wal­mart Inc. and Macy’s Inc. are due to re­port re­sults and in­vestors will be keen to hear what they say about labour.

Re­tail­ers and restau­rants tend to have large em­ployee bases and are ex­pected to be among the com­pa­nies most likely to feel the big­gest ef­fects of higher wages.

Mor­gan Stan­ley strate­gists wrote in a note this week that ho­tels, restau­rants, re­tail­ers, en­ergy equip­ment and ser­vices and IT ser­vices may be among the in­dus­tries most ex­posed to ris­ing wages. “Wage pres­sures have been build­ing for some­time, but we fi­nally saw them re­ally pop… in the Oc­to­ber jobs re­port, so I think that’s go­ing to con­tinue to be an is­sue,” said Kristina Hooper, chief global mar­ket strate­gist at In­vesco in New York.

Wor­ries about the po­ten­tial for wage in­fla­tion have been pick­ing up as eco­nomic data has shown that U.S. labour-mar­ket con­di­tions are tight­en­ing.

Wage pres­sures could in­creas­ingly be an is­sue as earn­ings-per­share growth for S&P 500 com­pa­nies is ex­pected to slow to about 9 per­cent next year fo ll ow­ing2018’ s tax-fu­elled earn­ings gains, es­ti­mated at 24 per cent, ac­cord­ing to IBES data from Refini­tiv.

In the re­cent U.S. jobs re­port for Oc­to­ber, wages recorded their largest an­nual gain in 9½ years.

A sep­a­rate re­port showed the Em­ploy­ment Cost In­dex, the broad­est mea­sure of labour costs, in­creased 0.8 per cent in the third quar­ter af­ter a 0.6-per-cent rise in the sec­ond quar­ter, putting the year-on-year rate of in­crease at 2.8 per cent.

A record 7.14 mil­lion open jobs are un­filled, and em­ploy­ers have been forced to boost wages to at­tract em­ploy­ees.

On­line re­tailer Ama­zon.com Inc. said last month it would raise its min­i­mum wage to US$15 an hour for U.S. em­ploy­ees start­ing in No­vem­ber.

More­over, chances for a higher fed­eral min­i­mum wage in­creased this week as Democrats won con­trol of the House of Rep­re­sen­ta­tives in con­gres­sional elec­tions.

McDon­ald’s Corp. chief fi­nan­cial of­fi­cer Kevin Ozan said on the com­pany’s Oct. 23 call with an­a­lysts: “There were a few pres­sures on mar­gins this quar­ter. One was, I’ll say, over­all labour pres­sures …”

Among other com­pa­nies that have talked about the ef­fect of higher wages, Chipo­tle Mex­i­can Grill Inc. chief fi­nan­cial of­fi­cer John Har­tung said in a con­fer­ence call the com­pany ex­pects labour costs to keep ris­ing in the fourth quar­ter, while Clorox Co. ex­ec­u­tives said wage in­fla­tion has been higher than an­tic­i­pated.

Prison op­er­a­tor CoreCivic Inc. also said in­creas­ing salaries and ben­e­fits were among costs that cut into third-quar­ter re­sults.

To be sure, the tax over­haul passed by Congress in late 2017 has helped com­pa­nies off­set a lot of ex­tra ex­penses, and third-quar­ter S&P 500 profit growth is on track to be the high­est since 2010.

Lower tax rates should en­able higher wages and main­tain­able mar­gins with­out the need to raise prices, ac­cord­ing to Rus­sell Price, se­nior econ­o­mist at Ameriprise Fi­nan­cial Ser­vices in Troy, Mich.

Gold­man Sachs strate­gists in a re­cent note said wage in­fla­tion is among key risks to S&P 500 profit mar­gins, along with higher tar­iffs and ris­ing debt costs.

“Man­age­ments ex­pressed con­fi­dence in their abil­ity to off­set tar­iff costs through price in­creases or sup­ply chain re­or­ga­ni­za­tion. How­ever, ex­ec­u­tives noted in­creased com­pe­ti­tion for la­bor and in­ten­si­fy­ing wage pres­sures,” they wrote.

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